How Does Bad Credit Affect Business Loans
There are many ways that bad credit can affect the business loan application process. Whether you can receive an approval, how long you can borrow the money for, as well as what you will pay for it can all be affected by your credit history. However, the actual impact bad credit has on the lending process is completely different than it once was.
Traditionally, or at least pre-recession, when you needed a business loan the likely destination was your local bank. The majority of approvals, as well as the subsequent amount, rates and terms were all mainly based on a borrower’s credit score. This process has not changed with banks today; in fact, borrowing from a bank is even more difficult now and limited to only those individuals with pristine credit. What has changed, and the impetus behind the new implications of bad credit, is that small business owners are no longer relying on banks for their business funding and the new sources that are available have a completely different protocol for approving loans.
Today the small business lending landscape is changing because private or alternative lenders have replaced banks as the go-to funding source. Over the last few years as banks decided to further tighten their lending policies the demand for small business loans inevitably grew. This demand created a new market where private companies pooled money together to loan to small businesses at a premium. These new lenders restructured the traditional approval process to be more flexible and borrower friendly.
Alternative business loan providers do not follow the same lending guidelines as banks when it comes to approving a loan. With alternative business funding small business owners can receive a business loan based on the cash flow and financial potential of their business. This does not mean that your credit history does not have implications when borrowing from an alternative lender, bad credit just does not have the all-or-none effect associated with bank borrowing. As both lenders have different policies in place, bad credit has a different effect depending on where you attempt to acquire a business loan.
Determining the effect bad credit has on your bank loan is simple, if you have anything less than an excellent credit score approaching the 800 FICO mark you are not likely to get approved. Banks are notorious for denying business loans, especially since the financial fallout, so there are no varying effects. It is an all-or-none policy that has only been further tightened over the last several years.
Bad credit in the alternative lending marketplace does has varying effects on an approval, the amount you receive, and your rates and terms as well. Although bad credit is not the major deciding factor when it comes to an approval, it does help determine whether a borrower is eligible. Alternative lenders look at the previous borrowing patterns of any potential borrower to see that their lowered credit score is a result of inevitable economic occurrences such as unpaid debts that result from slow business cycles. How bad credit can result in a denial is if the derogatory items on a credit report demonstrate a blatant disregard for paying creditors.
The larger point here is that alternative lenders do no simply look at the underlying FICO score of a credit report, they take an in-depth look at all of the details of a credit report. They will overlook reasonable past failures to pay creditors as long as they can be supported with legitimate business reasons and are not a clear display of neglect. This method for approving loans can be extremely beneficial for small business owners that demonstrate excellent cash flow but have bad credit for acceptable business reasons. This type of application that would be immediately rejected from a bank can become a prime borrower in the alternative lending space.
The in-depth analysis of bad credit also helps support how much the loan amount will be and its expected time for total reimbursement. The overall risk of the business loan can be partially determined by the amounts and times of your previous payment history to other creditors, and lenders can then establish a rate based on the risk involved. Additionally, if alternative lenders see that you normally miss payments during slow seasons they are likely to construct your funding package to be paid in full before the season approaches. Your payment history, whether good or bad, is essential to determining how much you qualify for as well as what the rates and terms should be.
Bad credit plays an essential role in qualifying for and receiving a business loan no matter what lender you choose. Although borrowing from a bank is usually not an option with a poor credit history, there are alternative lenders that provide business loans for bad credit. These lenders utilize an in-depth analysis of your credit history to help determine whether or not you qualify, and what the rates and terms should be. If you are considering applying for a business loan with bad credit, it is advised to get your business financials in a position that demonstrate consistent revenue and cash flow. You should also take the necessary steps to see that the derogatory items on your credit report only reveal failures to pay that can be explained away by inevitable fluctuations in business cash flow. Although bad credit is not the obstacle in once was when it comes to acquiring loans for your business, it still matters.